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39 Cards in this Set

That countries should simultaneously encourage exports and discourage imports.

When a government does not attempt to influence quotas, taxes, etc. There is no government intervention.

Free Trade

What was the goal of mercantilism?

You would be a richer country if you had trade surplus. If you sell more, you gain profits.

Who is the largest trade deficit?

The United States

Describe the Product Life Cycle

-proposed by Raymond Vernon
-Suggests that most new products are produced in and exported from the country in which they are developed.
-As it becomes more widely accepted, production starts in other countries.
-As a result, the product may ultimately be exported back to the country of its original innovation.

Describe the New Trade Theory.

-in some cases countries specialize in the production and export of particular products not because of differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. ex: Commercial Aircraft Industry

How was mercantilism achieved?

Imports were limited by tariffs and quotas while exports were subsidized.

One in which a gain by one country results in a loss by another

A zero-sum game

A situation in which all countries can benefit.

positive-sum game

How was mercantilism viewed?

As a zero-sum game-in another words, benefiting one company but not another

Attacked the mercantilist assumption that trade is a zero-sum game in his book, The Wealth of Nations. He argued that countries differ in their ability to produce goods efficiently.

Adam Smith

A country has this when it is more efficient than any other country in producing it.

Absolute Advantage

He believed that a country should never produce goods at home that it can buy at a lower cost from other countries. By specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.

Adam Smith

He took Adam Smith's theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. Makes sense for a country to specialize in the production of the goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

David Ricardo's Comparative Advantage Theory

The basic message of the theory of comparative advantage

Potential world production is greater with unrestricted free trade than it is with restricted trade.

The theory suggests that consumers in all nations can consume more if there are no restrictions on trade.

What are the 3 unrealistic assumptions made from the conclusion that free trade is universally beneficial?

Resources do not always shift quite so easily from producing one good to another.

Immobile Resources

Occurs when more units of resources are required to produce each additional unit. ex: while 10 units of resources can increase Ghana's output of cocoa from 12 tons to 13 tons, 11 units of resources may be needed to increase output from 13 to 14 tons, and so on.

Diminishing returns

What are the 2 reasons it is more realistic to assume diminishing returns?

-Not all resources are of the same quality
-Different Goods use resources in different proportions

They argued that comparative advantage arises from differences in national factor endowments-the extent to which a country is endowed with such resources as land, labor, and capital. Predicts that countries will export those goods that make intensive use of factors that are locally scarce. Argues that free trade is beneficial. It is diff than Ricardo's theory because it argues that the pattern of international trade is determined by differences in factor endowments rather than differences in productivity.

The Hecksher-Ohlin Theory

This theory has been one of the most influential theoretical ideas of international economics.

Heckscher-Ohlin Theory

Believed that since the US was abundant in capital compared to other nations, the US would be an exporter of capital intensive goods and an importer of labor intensive goods. He actually found that the US exports were less capital intensive than the US imports.

The Leontief Paradox

Initially proposed the product-life cycle in the mid 1960's.

Raymond Vernon

What is an example today of the product life cycle theory?

Technology can be transferred & started in other places

Began to emerge in the 1970s when a number of economists were questioning the assumption of diminishing returns to specialization used in international trade theory.

New Trade Theory

Unit cost reductions associated with a large scale of output.

Economies of scale

As a country produces more of the good, due to the realization of economies of scale, productivity will increase and unit costs will fall.

Economies of scale

What is the argument of New Trade Theory?

-both variety of goods that a country can produce and the scale of production are limited by market size.

-The domestic market may not be big enough to allow producers to realize economies of scale for certain products, those products may not be produced, and the variety of products will be limited to consumers.

Each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can increase the variety of goods avail to consumers and lower the costs of these goods-thus trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology

New Trade Theory

Cost savings that come from learning by doing. example: Labor learns by repetition how best to carry out a task.

Learning Effects

The economic and strategic advantages that accrue to early entrants into an industry

First-mover advantages

His belief in 1990 was that existing theories of international trade told only part of the story. His task was to explain WHY a nation achieves international success in a particular industry. What gives a country an advantage in a free market world?

Michael Porter

What are the four broad attributes of a nation that shape the environment in Porter's National Competitive Advantage Theory?